“In politics,” wrote Samuel Taylor Coleridge, “what begins in fear usually ends in folly.” The response of union leaders to the report by Lord Hutton of Furness on pension reforms manages to exemplify both those characteristics. Complaints of a “pensions raid” and threats of strikes fail the first test of responsible contributions to public debate, by refusing to recognise the scale of the problem with current arrangements.
Lord Hutton sets out what that problem is. The current system has been made unaffordable by demographic changes. There is a large and growing gap between contributions and payments. Lord Hutton’s report presents with admirable clarity the twin goals of pensions policy as providing public sector workers with a good pension in retirement, while ensuring that the benefits of increased life expectancy are shared between them and the taxpayer. And it proposes sensible ways of achieving that balance.
There are two principal measures that Lord Hutton recommends. First, the age at which public service workers can draw their pension should rise, to match the age for eligibility for the state pension. Second, public sector pensions should be linked to average pay during the worker’s career, rather than to final salaries. Doing so would substantially lower the cost to the State. A further measure, an increase of three percentage points from next year in employee contributions, has already been announced by the Government.
George Osborne appointed Lord Hutton, a former Labour minister, to provide an objective assessment of policy options. The peer has done that, and his report is a sound basis for policy.
A particular merit of the proposals is that Lord Hutton is aware of the emptiness of populist and clichéd complaints of “gold-plated pensions” in the public sector. He stresses that there must be no “race to the bottom” in pension provision.
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Public service is an essential task; many who choose it might command higher rewards in the private sector, but choose a career that enables them to contribute to the common good. It is unpalatable for those of them nearing retirement age to have to revise down their expectations of benefits that they will receive. And public service must remain an attractive option for talented people.
That is why Lord Hutton presents his recommendations in the form of what he succinctly calls The Deal. A public sector pension scheme linked to final salary is a benefit that workers in the private sector do not now generally enjoy, and the cost of these schemes to the taxpayer has attained unsustainable levels.
Public sector pension schemes paid out £32 billion in 2008-09. The value of benefits paid out by the five largest public sector schemes has expanded by a third. The current system is in effect a promise by the State to pay public servants a future income for work done now, with the costs being borne by future taxpayers.
There has to be a new accommodation between these constituencies. There are only three options for achieving it: higher employee contributions; a later retirement age; or a faster trend rate of economic growth, which this Government has not yet shown it knows how to achieve. That leaves a combination of the other two. Lord Hutton’s recommendations for them offer an equitable settlement between workers in the public sector and those whom they serve.